SEC points finger at brokers in BofA suit

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The SEC has accused mortgage brokers of originating the majority of the bad loans that went into an $855m mortgage-backed security deal that has landed a lawsuit at Bank of America’s door.

Bank of America and two of its subsidiaries were charged Tuesday with defrauding investors who bought residential mortgage-backed securities.

The Securities and Exchange Commission alleges that BOA and its subsidiaries, Bank of America Mortgage Securities and Banc of America Securities LLC (now Merrill Lynch, Pierce, Fenner & Smith) conducted an $855m RMBS offer called BOAMS 2008-A in 2008, without telling investors that many of the mortgages backing the offer were wholesale channel loans – high-risk loans described by BOA’s then-CEO as “toxic waste.”

About 70% of the loans were originated by brokers, and were documented to have higher default rates than non-brokered loans, the complaint stated. The SEC is suing Bank of America for not disclosing the large percentage of loans that were originated through its wholesale channel and the risks that they posed.

According to the complaint, BOA “only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors. Bank of America never disclosed this material information to all investors and never filed it publicly as required under the federal securities laws.”

The Department of Justice today filed a parallel civil action against BOA for violations of the Financial Institutions Reform, Recovery and Enforcement Act, according to a DOJ news release.

The DOJ alleges that although BOA told investors the loans were underwritten in accordance with the bank’s guidelines, they were in fact “'riddled with ineligible appraisals, unsupported statements of income, misrepresentations regarding owner occupancy, and evidence of mortgage fraud.”

“Bank of America’s reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors,” U.S. Attorney Tompkins said Aug. 6. “Now, Bank of America will have to face the consequences of its actions. We have made a commitment to the American people to hold financial institutions accountable for practices that violated the law and wreaked havoc on the financial system, and my office takes that commitment very seriously.”